Eurozone Rates Left Unchanged at 1%

The European Central Bank is expected later on Thursday to announce fresh moves dismantling emergency actions taken to shore-up financial markets, after its governing council left official eurozone interest rates unchanged at 1%., Financial Times 12/3/2009 9:31:47 AM

With eurozone inflation remaining subdued, no change in official ECB borrowing costs had been expected. But attention will focus on a press conference in which Jean-Claude Trichet, president, will set out the next steps in the central bank’s exit strategy”.

These are likely to include confirmation that an offer of one-year liquidity, scheduled for later this month, will be the last. The ECB could also charge a higher interest rate than its 1 per cent main rate – or link it to future moves in the policy rate. Mr Trichet is also likely to comment on the future of offers of three-month and six-month liquidity.

Since the collapse of Lehman Brothers, the ECB has provided banks with unlimited liquidity for periods up to 12 months. The amount outstanding in the eurozone financial system currently exceeds €670bn. Prior to the crisis that erupted in August 2007, the ECB was typically supplying about €450bn.

The ECB is pressing ahead with its exit strategy because it believes financial markets have returned to more normal conditions and fears some eurozone banks have become dependent on its emergency liquidity. The financial system and individual institutions within it must act now to ensure that a future removal of central bank support can be managed without painful ‘withdrawal symptoms’,” Mr Trichet told a banking conference in Frankfurt last month.

The ECB remains wary, however, about eurozone economic prospects. Revised ECB forecasts are expected to show the outlook has improved since September, when it expected gross domestic product to rise next year at a rate in a range with a mid-point of 0.2 per cent. But Mr Trichet may cite events in Dubai in support of his view that the recovery will remain bumpy”.

He will also calibrate his message carefully because Ben Bernanke also speaks later on Friday at hearings on his reappointment as US Federal Reserve chairman. The euro has risen further against the dollar this week, and signs that the ECB has become more hawkish” in relation to the Fed, could drive the currency higher.

At the same time, inflationary pressures in the eurozone remain modest. The annual rate turned positive in November, when it was 0.6 per cent, and a further acceleration is expected in December. But the rise reflects higher oil prices, and core” inflation – which excludes volatile energy and food prices – is still falling. Economists believe inflation will continue in 2010 to undershoot by a large margin the ECB’s target of an annual rate below but close” to 2 per cent.

Eurozone Rates Left Unchanged at 1%